NEW YORK, (Reuters Breakingviews) - Recent market turmoil is the last straw for hard-pressed investment managers. State Street said on Friday it will slash its payroll by 6 percent, or about 1,500 positions. Both the selloff in stocks and withdrawals by clients hit the company’s assets under management in the fourth quarter. It’s just the latest blow for a sector already reeling from fee pressure.

State Street’s cuts are deeper than those announced last week by industry behemoth BlackRock, and reflect just how fast business conditions have deteriorated. The Boston-based manager, the third-largest behind BlackRock and Vanguard, saw AUM decline 11 percent between September and December to $2.5 trillion. Management fees dropped 7 percent in the fourth quarter from the preceding period.

That was only one part of a double whammy. State Street holds nearly $32 trillion in assets under custody and administration for other managers, rivaling Bank of New York Mellon as the biggest in the business. With clients squeezed by the ongoing shift from actively managed funds into the low-cost indexed products pioneered by the late Vanguard founder, Jack Bogle, they are demanding cuts in servicing fees, by far the firm's biggest revenue line. Executives say customers in recent weeks have been renewing custody contracts at prices some 4 percent lower, compared with reductions of less than 2 percent in previous years.

“It’s pervasive, it’s intensive,” Chief Executive Ronald O’Hanley said of the pressure. The firm is responding by adopting more automation, retiring legacy software, consolidating back-office hubs, and cutting staff in high-cost regions, akin to AllianceBernstein’s decision last year to move jobs from New York City to Nashville, Tennessee.

Rivals are sure to follow suit. Investors pulled a whopping $300 billion out of U.S. mutual funds run by stock and bond pickers last year, most of it in the final quarter, according to Morningstar, while putting nearly $460 billion into cheaper passive funds. At the once high-flying Franklin Templeton Investments, whose emerging-markets specialty and active approach have fallen from favor, assets under management fell by over $100 billion, or nearly 14 percent, last year. Overall, there are sure to be plenty more pink slips ahead.

CONTEXT NEWS

- State Street on Jan. 18 said it would reduce its workforce by 6 percent, or about 1,500 employees, to lower expenses. The initiative includes cuts of 15 percent in the number of senior managers. The company said it expects to save $350 million in expenses in 2019 as a result.

- The company also reported that net income available to common shareholders was $398 million or $1.04 a share in the fourth quarter of 2018, up from $334 million or 89 cents a share in the same period a year earlier. Excluding a $223 million charge for the job cutbacks and other one-offs, earnings were $1.68 a share, just ahead of the mean estimate of analysts polled by Refinitiv’s I/B/E/S. Revenue totaled $3 billion in the quarter, up 4.9 percent from a year earlier.

(Editing by Richard Beales and Martin Langfield)

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